Month: July 2013

By Profit Confidential

In the first quarter of 2013, we saw an interesting and unexpected development. While the corporate earnings of S&P 500 companies were better than expected, their revenues weren’t nearly as impressive.

Just 46% of S&P 500 companies reported revenues above estimates. (Source: FactSet, May 31, 2013.) And the second-quarter corporate earnings might be similar—if not worse.

As we are just entering the earnings season, many S&P 500 companies have yet to report their corporate earnings, but some of the big household names have already started to strengthen my opinion.

Take The Coca-Cola Company (NYSE/KO), for example. The S&P 500 company not only reported a decline in corporate earnings, but also showed a decline in revenues. For the second quarter, Coca-Cola’s net revenues declined three percent from a year ago. Similarly, the company’s corporate earnings also dropped three percent, registering at $0.59 per share in the second quarter, compared to $0.61 in the same period a year ago. (Source: The Coca-Cola Company web site, July 16, 2013.)

In much the same vein, Mattel, Inc. (NYSE/MAT)—the world’s largest toy maker and constituent of the S&P 500—reported corporate earnings that were 25% lower than a year ago, noting that sales missed analysts’ expectations. Revenues registered at $1.17 billion, while analysts had been expecting $1.22 billion. Corporate earnings for Mattel declined to $0.21 per share from $0.28 per share year-over-year. (Source: Reuters, July 17, 2013.)

Another big name that’s reporting negatively is Yahoo! Inc. (NASDAQ/YHOO). This S&P 500 company reported corporate earnings that were above the consensus, but revenues witnessed a slight decline—$1.071 billion compared to $1.081 billion in the second quarter of 2012. In the near future, the company expects revenues to be lower than what it previously anticipated. (Source: Reuters, July 16, 2013.)

Keep in mind that before second-quarter earnings season began, we had 87 S&P 500 companies issue negative earnings guidance. The information technology and consumer discretionary sectors of the S&P 500 had the largest number of companies issuing negative guidance about their corporate earnings relative to their five-year average. (Source: FactSet, June 28, 2013.)

It’s odd that all these troubling developments in the corporate earnings of big-cap companies are going unnoticed in the mainstream media. What I see in the media are just stock advisors staying optimistic and not taking into consideration the reliability of corporate earnings.

Consider the Investors Intelligence Advisor Sentiment index. It has been increasing for three consecutive periods and is closing in on highs made in mid-May of 2012. (Source: Investors Intelligence, July 17, 2103.)

But I still see big-cap companies still trying their best to boost their corporate earnings through other means—call it financial engineering.

Take Yahoo!, for example. In the past few quarters, the S&P 500 company has purchased $3.65 billion worth of its own shares back, and in its first-quarter corporate earnings announcement, the company was very clear that it plans to purchase another $1.9 billion worth of its own shares back.

These anemic revenues mean that companies are not really selling more, and deteriorating earnings combined with key stocks heading higher continues to add more evidence to my belief that what should be a bear market is rallying by doing a masterful job at luring investors.

While it’s certainly not popular to be bearish in this market, the facts appear to be in my favor.

Michael’s Personal Notes:

The Federal Reserve has made it very clear that it wants to stop quantitative easing. But it has also made it just as clear that it won’t begin to taper its quantitative easing program until certain conditions are met.

While speaking in front of the Committee on Financial Service, here’s what the chairman of the Federal Reserve, Ben Bernanke, said about ending quantitative easing: “I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions—which have tightened recently—were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer.” (Source: Board of Governors of the Federal Reserve System, July 17, 2013.)

But no matter when quantitative easing ends, one thing has become certain—it will have its victims. And the biggest victim of quantitative easing I see will be the bond market.

In its meeting in May, the Federal Reserve hinted that the quantitative easing will be slowing sometime later this year and ending completely next year. Since then, the bond market has seen selling. I have mentioned in these pages how the bond prices have declined and yields have soared higher.

The Investment Company Institute (ICI) reports that for the week ended July 2, 2013, the outflow from bonds mutual funds was $5.9 billion. (Source: Investment Company Council, July 10, 2013.)

And from the week ended June 5 until the week ended July 2, $66.65 billion was pulled from the bond mutual funds. If the bond mutual funds register a net outflow for June, then this would be the first net outflow since August of 2011.

What you need to realize is that the bond market is very big in size—much bigger than the stock market—and, if it declines, it could have a significant impact on the economy.

Consider this: if the bond market starts to see higher yields, then the mortgage rates will increase. We are already starting to see this. Just look at the chart below. It shows that companies that borrow to run their daily expenses will be paying more and in general, the cost of goods can increase.

Quantitative easing in the U.S. economy hasn’t done much for the economy, and it’s just a matter of time until things turn sour.

What we saw in the bond market since May is just a minor episode of what might happen when the Federal Reserve starts to taper its quantitative easing program.

To all bond investors: be careful—to enter the bond market now would be to tread in dangerous waters.

Article by profitconfidential.com

By Profit Confidential

The Federal Reserve has made it very clear that it wants to stop quantitative easing. But it has also made it just as clear that it won’t begin to taper its quantitative easing program until certain conditions are met.

While speaking in front of the Committee on Financial Service, here’s what the chairman of the Federal Reserve, Ben Bernanke, said about ending quantitative easing: “I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions—which have tightened recently—were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer.” (Source: Board of Governors of the Federal Reserve System, July 17, 2013.)

But no matter when quantitative easing ends, one thing has become certain—it will have its victims. And the biggest victim of quantitative easing I see will be the bond market.

In its meeting in May, the Federal Reserve hinted that the quantitative easing will be slowing sometime later this year and ending completely next year. Since then, the bond market has seen selling. I have mentioned in these pages how the bond prices have declined and yields have soared higher.

The Investment Company Institute (ICI) reports that for the week ended July 2, 2013, the outflow from bonds mutual funds was $5.9 billion. (Source: Investment Company Council, July 10, 2013.)

And from the week ended June 5 until the week ended July 2, $66.65 billion was pulled from the bond mutual funds. If the bond mutual funds register a net outflow for June, then this would be the first net outflow since August of 2011.

What you need to realize is that the bond market is very big in size—much bigger than the stock market—and, if it declines, it could have a significant impact on the economy.

Consider this: if the bond market starts to see higher yields, then the mortgage rates will increase. We are already starting to see this. Just look at the chart below. It shows that companies that borrow to run their daily expenses will be paying more and in general, the cost of goods can increase.

Quantitative easing in the U.S. economy hasn’t done much for the economy, and it’s just a matter of time until things turn sour.

What we saw in the bond market since May is just a minor episode of what might happen when the Federal Reserve starts to taper its quantitative easing program.

To all bond investors: be careful—to enter the bond market now would be to tread in dangerous waters.

Article by profitconfidential.com

By Profit Confidential

I just filled my gas-guzzling SUV that only uses premium gasoline; trust me when I say it wasn’t pleasant. And I know I will need to visit the gas station again in just a few days.

I accept that, but what I don’t understand is the surging increase in oil prices. Oil is now more than $106.00 a barrel.

I realize we have the uncertainties in Egypt after the ousting of the country’s former leader Mohammed Morsi by the army. Of course, while Egypt is not a major oil producer, the Suez Canal does run through it. And a huge amount of Middle Eastern oil is carried through the canal to the Mediterranean Sea from the Red Sea.

At the current price for oil, the technical picture continues to point to gains in the near term. But I would look at an upside move in oil prices as an opportunity to sell if you currently have oil exposure. Oil is not in a sustainable upward move or bull market.

But the commodity is still advised for traders. I would expect a return to normalcy in the near future, with oil prices retrenching back to less than $100.00 a barrel.

The chart of the West Texas Intermediate crude (WTIC) oil prices below shows the overextension from the previous sideways channel, with $98.00 on the top end. I doubt the breakout will hold as the underlying fundamentals are not supporting a situation of a demand-supply imbalance.

Chart courtesy of www.StockCharts.com

The U.S. economic recovery is ongoing, but it’s also showing signs of stalling. U.S. companies are struggling to grow revenues and that implies a potentially lower demand for oil.

The global economy isn’t going gangbusters either, with muted growth from Europe to Asia and Latin America.

For oil prices to have a sustainable upward move at more than $100.00, we need to see the demand side explode upwards. And no signs indicate that will happen.

In addition, the Organization of Petroleum Exporting Countries (OPEC), the oil cartel, can no longer really influence world oil prices as much as it did in the past when it often held world markets captive.

Also America is producing much more oil now than in the past and this will continue to increase as shale oil from North Dakota and Montana is being pumped via fracking techniques. (Read “Why This Cold Prairie State Is an Investment Hotspot.”)

It’s wise to take a look at the oil companies and those supplying services to them. The prices of these oil stocks are headed higher, but not at the same rate as oil, because traders know the jump in oil prices is only temporary; it’s not sustainable.

Article by profitconfidential.com

By Profit Confidential

In what can only be described as another excellent quarter of performance and growth, Johnson & Johnson (JNJ) once again beat Wall Street consensus with its earnings.

The company defied the odds and posted genuine business growth—not just domestically, but abroad as well. Similar to its first-quarter performance, the company seems to be on a bit of a roll.

Johnson & Johnson reported revenues of $17.9 billion for the second quarter of 2013, a solid increase of 8.5% over the comparable quarter in 2012. Domestic sales grew eight percent, which was expected; the surprise was in the company’s international sales, which grew 11.8% in total, with a negative currency impact of 2.8% for a net growth of nine percent. This growth measure includes acquisitions and divestitures; excluding those, global operational sales growth was 5.6%.

Global pharmaceutical revenues were $7.0 billion in the second quarter for a net gain of 11.7% comparatively. Domestic pharmaceutical sales grew 9.1%.

Johnson & Johnson’s operational top-line growth really is solid, considering today’s economically challenged global economy. The company appears to be in the right businesses at the right time, at least according to the numbers.

On the stock market, Johnson & Johnson’s shares have soared as the marketplace chases the safest, dividend-paying stocks that are actually able to generate real economic growth.

The company’s stock chart is featured below:

Chart courtesy of www.StockCharts.com

Earnings were $3.8 billion (including a gain on sale and an after-tax gain), and diluted earnings per share (EPS) were $1.33, handedly beating Wall Street estimates.

Not only did Johnson & Johnson’s numbers beat consensus, but the company also increased its full-year 2013 guidance. The company raised its earnings forecast to a range of $5.40–$5.47 a share excluding items. At the beginning of the year, Johnson & Johnson forecast earnings between $5.35 and $5.45 a share.

Speaking of beginnings, Johnson & Johnson’s share price is up a whopping $20.00 a share (not including dividends) since the beginning of the year. The company is now worth a quarter of a trillion dollars, which is truly amazing for such a mature brand.

Johnson & Johnson exemplifies the kind of stock that institutional investors want to own in this kind of market. The company has diversified operations, so there are good prospects for dividend increases going forward, and there’s a lot of safety in what this company is selling.

Revenues and earnings growth, while not robust, were still very impressive for a company of this size. (See “The One Market Sector That’s Consistently Outperforming the Rest.”)

The company really hasn’t done much on the stock market over the last seven years—until recently, when all of a sudden it did. But that is how so many large-cap, blue-chip companies trade: periods of nonperformance are met with increasing dividends followed by a comparatively short breakout representing the majority of the position’s capital gains over a period of time.

The opportunity cost of not being in the position while it is experiencing its breakout capital gains is significant.

Johnson & Johnson serves to illustrate that great businesses tend to remain just that—great—and that long-term ownership with dividend reinvestment is an excellent way to generate meaningful investment returns.

Without question, this company is due for a stock market correction.

Article by profitconfidential.com

By Profit Confidential

The eurozone is still a mess. Instead of improvements, I just see more troubles. Economic slowdown in the region’s debt-infested nations is already staggering, but even those that were able to fight it are now experiencing huge problems.

Around this time last year, the European Central Bank (ECB) was very clear about its plan for the eurozone crisis. It said that it’s “ready to do whatever it takes.”

Back then it was the greatest relief to the market—the announcement calmed the rising debt rates in the eurozone and sent a wave of optimism toward the key stock indices.

But it was just a short-term fix. Take my word for it: economic slowdown in the eurozone is here to stay for a long time.

Take, for example, France—the second-biggest economy in the eurozone. France used to have a credit rating of AAA, according to credit rating agency Fitch Ratings, which is the best rating among its other eurozone peers. But France has since been downgraded a notch by the credit rating agency. (Source: Wall Street Journal, July 12, 2013.)

Fitch cited that the eurozone country’s national debt compared to its gross domestic product (GDP) reached 91.7% in the first quarter of 2013. It expects the French national debt ratio to peak at 96.0% in 2014.

Fitch also provided an anemic outlook for the French economy. The credit rating agency expects the country to witness an economic slowdown this year, following mediocre growth in 2012. Unemployment in this France is also troublesome. It stands at a 15-year high of 10.9%.

Germany, the biggest economic hub in the euro region, is experiencing turbulence as well. It’s not seeing an outright economic slowdown, but it’s certainly not far from it. Exports from the country plummeted nine percent in May to 38.1 billion euros. German investor confidence also declined for the first time in three months—suggesting that the economic outlook isn’t very bright. (Source: Bloomberg, July 16, 2013.)

Here’s what all the economic slowdown in the eurozone comes down to: the corporate earnings of the companies trading on key stock indices.

Dear reader, you need to keep in mind that the eurozone, all 17 member nations combined, consumes a significant amount of goods and services. If the unemployed in the region hits a record high, major hubs start to slow down, and demand becomes the next victim.

In the first quarter, we saw 11 of the 30 Dow Jones Industrial Average companies provide their sales figures from the eurozone. Nine of the 11 reported a decline year-over-year. (Source: FactSet, May 28, 2013.)

We are currently in the midst of second-quarter earnings season. I expect more companies to show struggles in the region. My reason is very simple: even if we disregard the already struggling eurozone nations like Greece and Spain, stronger nations like France are suffering an economic slowdown, and Germany is struggling. There will be consequences.

Michael’s Personal Notes:

Face it: there is no real economic growth in the U.S. economy. The only reasons the key stock indices keep rising are nothing more than easy money and false optimism. They are anything but a key indicator, and you should not use them as one.

The reality of the U.S. economy is completely the opposite of what’s happening in the markets.

I often say in these pages that economic growth only occurs in the U.S. economy when consumers feel good and spend money. But I see more and more evidence of consumers not spending—many are actually struggling. Don’t buy into the mainstream media’s belief in economic growth.

Instead, look at indicators like the U.S. retail and food services sales for June. They increased 0.4% from the previous month to $422.8 billion and have increased 5.7% from June of 2012. In the second quarter (April through June), retail and food services sales in the U.S. economy were up 4.6% from the same period a year ago. (Source: U.S. Census Bureau, July 15, 2013.)

While that might sound impressive, the chart below will show you something you won’t see the in the mainstream. It shows the percentage change in retail and food services sales from a year ago.

 Clearly, the retail sales increases aren’t nearly as amazing as they seem at first glance. The rate of change is actually slower than it was a year ago—and has been trending downward since 2011.

But there’s further proof consumers are not buying. Manufacturing and trade inventories for the month of May have increased 0.1% from April, and 3.8% from a year ago.

And some industries are feeling it worse than others. Inventories at motor vehicle and part dealers were up 12.7%, and inventories for clothing and clothing accessories stores increased 4.6%. (Source: U.S. Census Bureau, July 15, 2013.)

Here’s what is actually happening: consumers in the U.S. economy are spending their money on basic needs. From April to June, consumer spending at gas stations has increased little more than 3.3%.

What’s even more troubling is that crude oil prices have jumped due to tensions in the Middle East. That means that gas prices will soar even higher. And that will result in even more trouble for consumers in the U.S. economy.

On top of all this, contrary to economic growth, Americans have another problem. Instead of getting full-time jobs, many are only able to get part-time work. This year, on average, the number of part-time jobs that have been added each month in the U.S. economy, seasonally adjusted, sits at 93,000. But only about 22,000 full-time jobs have been added. (Source: Wall Street Journal, July 14, 2013.)

Dear reader, I find myself tired of saying this, but numbers don’t lie. They are saying economic growth in the U.S. economy is simply a myth. You must keep in mind that consumers are the driving force behind any economic growth in the U.S. economy. The longer they suffer, the longer it will take the U.S. economy to get back on its feet.

We may see higher corporate earnings from big-cap companies for now. They are buying back their shares, but consumers are the ones who buy their products. The numbers will eventually catch up, and their corporate earnings will suffer.

Article by profitconfidential.com

By Profit Confidential

Face it: there is no real economic growth in the U.S. economy. The only reasons the key stock indices keep rising are nothing more than easy money and false optimism. They are anything but a key indicator, and you should not use them as one.

The reality of the U.S. economy is completely the opposite of what’s happening in the markets.

I often say in these pages that economic growth only occurs in the U.S. economy when consumers feel good and spend money. But I see more and more evidence of consumers not spending—many are actually struggling. Don’t buy into the mainstream media’s belief in economic growth.

Instead, look at indicators like the U.S. retail and food services sales for June. They increased 0.4% from the previous month to $422.8 billion and have increased 5.7% from June of 2012. In the second quarter (April through June), retail and food services sales in the U.S. economy were up 4.6% from the same period a year ago. (Source: U.S. Census Bureau, July 15, 2013.)

While that might sound impressive, the chart below will show you something you won’t see the in the mainstream. It shows the percentage change in retail and food services sales from a year ago.

 Clearly, the retail sales increases aren’t nearly as amazing as they seem at first glance. The rate of change is actually slower than it was a year ago—and has been trending downward since 2011.

But there’s further proof consumers are not buying. Manufacturing and trade inventories for the month of May have increased 0.1% from April, and 3.8% from a year ago.

And some industries are feeling it worse than others. Inventories at motor vehicle and part dealers were up 12.7%, and inventories for clothing and clothing accessories stores increased 4.6%. (Source: U.S. Census Bureau, July 15, 2013.)

Here’s what is actually happening: consumers in the U.S. economy are spending their money on basic needs. From April to June, consumer spending at gas stations has increased little more than 3.3%.

What’s even more troubling is that crude oil prices have jumped due to tensions in the Middle East. That means that gas prices will soar even higher. And that will result in even more trouble for consumers in the U.S. economy.

On top of all this, contrary to economic growth, Americans have another problem. Instead of getting full-time jobs, many are only able to get part-time work. This year, on average, the number of part-time jobs that have been added each month in the U.S. economy, seasonally adjusted, sits at 93,000. But only about 22,000 full-time jobs have been added. (Source: Wall Street Journal, July 14, 2013.)

Dear reader, I find myself tired of saying this, but numbers don’t lie. They are saying economic growth in the U.S. economy is simply a myth. You must keep in mind that consumers are the driving force behind any economic growth in the U.S. economy. The longer they suffer, the longer it will take the U.S. economy to get back on its feet.

We may see higher corporate earnings from big-cap companies for now. They are buying back their shares, but consumers are the ones who buy their products. The numbers will eventually catch up, and their corporate earnings will suffer.

Article by profitconfidential.com

By Profit Confidential

The cement business is as good a benchmark as you are going to get on the U.S. economy. And if this company is any indication, cement sales are accelerating at a double-digit rate.

Texas Industries, Inc. (TXI) sells cement and aggregates mostly in Texas and California, the two largest cement markets in the U.S.

In 2007, the company’s cement capacity was two million tons per year. Today, the company can produce six million tons per year and is targeting eight million tons per year over the next several years.

The company’s latest earnings results were excellent.

In its fiscal fourth quarter of 2013 (ended May 31, 2013), the company’s total sales grew to $213.5 million, up solidly from comparable quarterly sales of $158.5 million.

Company management said its latest quarter saw double-digit percentage growth in all its products shipped. The Texas market in particular is experiencing a “strong recovery” in cement demand.

The company reported that total cement shipments increased 23% in Texas and 22% in California over the prior fiscal year. Average prices increased four percent in Texas and decreased three percent in California.

For a cement company, Texas Industries trades like a high-flying technology stock. It’s a trader’s paradise with a high valuation and significant price volatility.

While cement unit costs increased markedly in its latest quarter, mostly due to higher energy expenses, the big rise in cement shipments surprised the marketplace and was way ahead of Wall Street expectations. The numbers support new construction growth in the two largest U.S. markets.

Oddly, a lot of the cement business in the U.S. is foreign controlled. The largest cement company in the world is generally considered to be Paris-based Lafarge S.A. (LG.PA), followed by Mexico-based CEMEX S.A.B. de C.V. (CX).

Both companies reported weaker earnings results in their latest quarters, but that was due to operations in foreign markets. CEMEX noted in its 2013 first-quarter earnings report that U.S. sales grew eight percent, reflecting improving demand in spite of unfavorable weather conditions.

The company said that there is momentum in industrial and commercial sectors, but that the residential sector of the U.S. market continues to be the main driver of domestic cement consumption.

Certainly, what Texas Industries reported in its recent earnings results was encouraging. Wall Street expects the company to grow its sales just over 25% in fiscal 2014 and 14% the following year. Double-digit sales growth is a tough thing to come by these days. (See “How Big Institutional Investors Will React to This Quarter’s Weak Earnings Results.”)

Cement and aggregate is commoditized and consumption demand is inconsistent. But like I’ve said before, if there is to be meaningful economic recovery in the global economy, it will be led by the U.S. economy.

The numbers for new demand in cement shipments support that view. Whether the growth is sustainable or not is a whole other question.

Article by profitconfidential.com

By Profit Confidential

In an ironic twist, the subprime credit crisis was probably what was needed to save the banking sector. The failure of Lehman Brothers that drove the financial crisis and recession also prompted the government to force big banks to clean up their business.

I still recall when Citigroup Inc. (NYSE/C) was trading at $1.00 a share in 2008, before its stock consolidation. A friend of mine at the time, who was the head of a global money management unit of a large bank, asked what I thought of Citigroup and whether I would buy it. My quick response was “yes.” I argued that I doubt the government would allow the bank to fail after what had happened at Lehman. In hindsight, I was right. Citigroup, along with some of the other big banks, was saved by the government.

I still feel it was a correct move and continue to believe the big banks were “too big to fail.” Without the emergency capital injection into the banking system, America’s financial infrastructure would have collapsed, which would have resulted in economic chaos and tens of thousands of lost jobs.

The best development in the process of reorganizing banking in America was the establishment of the “Volcker Rule.” Named after ex-Federal Reserve chairman Paul Volcker, it essentially required the big banks to play by his rules. In other words, banks were required to cut down the risk on their balance sheets with added disclosure. Of course, there are still some issues regarding banking improprieties, but essentially, the Volcker Rule has helped to create a stronger, viable U.S. banking system.

Evidence of that was shown last week with the big banks continuing to deliver relatively strong results.

JPMorgan Chase & Co. (NYSE/JPM), Wells Fargo & Company (NYSE/WFC), and Citigroup all delivered results that beat Wall Street estimates for both revenues and earnings.

I was not surprised by this, as I have long been a backer of the big banks. (Read “With Higher Interest Rates Coming, This Is Where You Need to Be.”)

In fact, the strong leadership from the big banks has helped drive up the overall market this year.

Just take a look at the chart of the Philadelphia Bank Index below—it’s a thing of beauty. Note the bullish flag formations indicated by the parallel lines that are preceded by a rally and followed by another rally, based on my technical analysis. This is bullish, and we’ll see if another flag may be in formation.

Chart courtesy of www.StockCharts.com

Moreover, I expect a potential upward push for the shares of Bank of America Corporation (NYSE/BAC) and Citigroup by institutional and retail money once these big banks are allowed to raise their dividend payout from their current low levels to what is now being paid out by Wells Fargo and JPMorgan.

Article by profitconfidential.com

Source: Tom Armistead of The Energy Report (7/18/13)

http://www.theenergyreport.com/pub/na/15445

As an oil analyst at SunTrust Robinson Humphrey, it’s a given that Neal Dingmann has his eye on energy stocks come rain or shine. But whether you’re bullish or bearish on U.S. shale development, it’s wise to know which stocks are poised to deliver shareholder value. In this interview with The Energy Report, Dingmann tiptoes through North America’s major shale plays (including an interesting hybrid) and points out the cream of the crop.
The Energy Report: Neal, between offshore and shale, is the U.S. on a path to energy independence?

Neal Dingmann: We’ve been heading in that direction, and the development of technology has really expedited that. I think increased production is a trend that’s going to continue. Even the U.S. Energy Information Administration (EIA) said we could become an exporter for some oil products down the road. So I believe we’re reaching that goal incrementally and U.S. shale plays have been a deciding factor.

TER: How do the risks and rewards compare for players in shale and offshore, respectively?

ND: With any sort of oil drilling, you always have some risk. Offshore exploration, at least to some degree, carries more exploration risk. When you’re onshore in a lot of these shale plays, you’re not looking at if you’re going to have oil, gas or a dry hole. You’re usually just trying to decide if the economics justify the entire drilling program.

TER: Of the companies you cover, which ones are the top picks for their shale production and which ones for their offshore production?

ND: Currently, I continue to be a bit cautious offshore, recommending only a company called W&T Offshore Inc. (WTI:NYSE). WTI is attractive because of its higher-than-average historical well success rate in addition to the cash flow from producing assets in the region. The company also has some attractive Permian assets that make for a nice complement to the offshore blocks.

Onshore, my favorite play is the Utica Shale, in which my top plays are Gulfport Energy Corp. (GPOR:NASDAQ) and Rex Energy Corp. (REXX:NASDAQ). Both companies have highly economic acreage, solid balance sheets and industry-leading production growth. I also like Rex Energy for its likely production upside. Another one of my favorite plays is the Eagle Ford Shale, in which my top plays arePenn Virginia Corp. (PVA:NYSE) and Sanchez Energy Corp. (SN:NYSE). Both have core acreage in the region, improving operating results and experienced management. Another favorite name of mine isMidstates Petroleum Co. Inc. (MPO:NYSE). The company has assets in three solid plays and a management team with a long successful track record. Those are my favorite names at this time.

TER: How does the Utica compare with the Eagle Ford and the Marcellus?

ND: The Utica shares some similarities with the Marcellus and the Eagle Ford. But each of these plays has different commodity windows, and you’re just hoping with the economics out there today to have more oil and liquids versus dry gas. Unfortunately, for much of the Utica play, it appears that the oil window does not work as well as it does in the Eagle Ford. However, it seems that both the Utica and Eagle Ford have a higher total percentage of liquids than the Marcellus, on average.

TER: What other shales rank high with you?

ND: We’ve seen a transformation in the Permian Basin. Exploration and production companies (E&Ps) have been finding new zones in there. So the Permian ranks very high right now. The Bakken is still on the map, though that play is a bit more price sensitive. Today’s oil prices can certainly support it, but at lower oil prices, it gets more difficult.

TER: Are there any new shale plays to talk about?

ND: I would say there currently are no meaningful or material new shale plays out there. There are some smaller offshoots of existing plays. You have the Woodbine, near the Eagle Ford, and the so-called Eaglebine, a combination play. But is there a new Utica that has come along? No, not recently. What we’re seeing is just progress in the existing plays because technology continues to improve.

TER: There is some controversy over whether gas should be exported or used domestically for fuel and feedstock. Do you think Congress is going to try to restrict exports?

ND: There is certainly a large lobby from the plastics and fertilizer industries. I think that lobbying power is going to be the initial challenge, but I believe that the EIA and other agencies in the U.S., along with the Independent Petroleum Association of America (IPAA) and other gas agencies, can basically justify exporting natural gas.

TER: Even so, if there were an export restriction, what effect would that have on the gas market and the explorers and producers?

ND: If Congress does step in and announce that there are going to be some restrictions, that would put more pressure on gas producers. It would keep somewhat of a cap on dry natural gas prices.

TER: Cheniere Energy Inc. (LNG:NYSE.MKT) has commercial contracts for five of its six planned liquefied natural gas (LNG) trains. What are the prospects for more companies to build LNG plants?

ND: I think the prospects are high. I know there are a couple of companies in Texas and other regions that are proposing this. But I think it would be easier if a Chevron Corp. (CVX:NYSE) or an Exxon Mobil Corp. (XOM:NYSE) decided to get into U.S. gas exports, given their immense capital and solid safety records. Whereas if it’s a small independent, I think it might have trouble getting approval any time soon.

TER: How will natural gas exports affect large and junior oil and gas companies?

ND: Any natural gas exports would be a net positive for the large and junior oil and gas companies, as the shipments would increase the price of the commodity. However, the larger companies would likely have better access to any export infrastructure. Those companies would likely benefit first.

TER: What are your forecasts for oil and gas prices?

ND: Right now, we expect prices to stay rather range bound. I would say oil prices for the next 12 months would peak around the $110 per barrel ($110/bbl) level and then fall just below $90/bbl. For natural gas, again, you might have a little bit of a run coming into this next winter that would take it back over $4 per thousand cubic feet ($4/Mcf), but because of the supply, I don’t see it lasting much over $4/Mcf very long. It would probably get back to $3.75 or $3.50/Mcf, closer to the handle where it is today.

TER: What effect will President Obama’s climate change plan have on the oil and gas companies that you cover?

ND: It might influence what some of the companies I cover decide to do on next year’s capital plan, for example, but I don’t really expect anything material to arise in the near term.

TER: You cover a lot of companies. What draws you to cover these companies in particular?

ND: I generally look play by play in the U.S. I look at a lot of the basins you and I spoke about today—the Utica, Eagle Ford, Permian, etc., I look at a number of companies in each, and then identify which plays we like the best. We recommend several names in a play like the Utica Basin. If it’s an area like the Granite Wash, which is not our favorite play, we’ll generally only focus on one company or two at most.

TER: What are your favorite companies right now?

ND: Definitely my top pick of all our stocks is Gulfport Energy. It is the most leveraged to the Utica shale and has tremendous upside.

Sanchez Energy and Penn Virginia are two of the most levered plays in the Eagle Ford. Both companies are likely to continue to announce record well results.

Last, Midstates Petroleum is in three areas—the Gulf Coast, Anadarko Basin and the horizontal Mississippi. The company should see solid production growth in each play.

TER: In one of your recent newsletters listing your favorites in the Utica, you had ranked Gulfport as the first in the Utica but Rex Energy second and Carrizo Oil & Gas Inc. (CRZO:NASDAQ) third. How does Carrizo fit in here?

ND: The Utica names are still some of our favorites out there and we continue to like most names in the southern part of the play. So we also recommend Carrizo, but the difference is the company is not as levered to the Utica as Gulfport or Rex. However, Carrizo also has solid asset positions in the Eagle Ford, Marcellus and Niobrara, all of which should generate positive returns.

TER: How has the shrinking spread between West Texas Intermediate (WTI) and Brent affected the companies in your portfolio?

ND: What we’re seeing, all the way from the Eagle Ford down to the Gulf Coast and offshore, is that companies with Louisiana Light Sweet crude pricing have had a very nice benefit over the last year to two where we’ve seen a premium of over $10/bbl. Although they have lost some of that spread, they’re still in a very positive situation and continue to enjoy a premium, albeit a smaller one. So companies priced off WTI are now realizing returns closer to those that are levered to Brent or Louisiana Light Sweet.

TER: What’s your biggest nightmare and what’s your biggest dream for the E&P space?

ND: I think the nightmare is always regulation restricting fracking or other well completion activity. Inaccurate information could set policies that have a very negative influence on the energy industry. If legitimate data show that fracking has negative effects on the environment, I’m all for restrictions that would mitigate those risks. But the industry has more than documented that the chances of fracking causing any of these issues is very slim. The more relevant issues these days appear to involve the midstream segment, especially shipping, as seen by the recent derailment in Quebec. While it is difficult to know if more regulation could have prevented this accident, it appears more oversight might be needed.

Probably the home run is for the U.S. to make enough oil and gas and be allowed to export it, much like the 1970s or 1980s, when the U.S. had so much oil and gas production, we were no longer a price taker, as the U.S. has been for some time in the energy industry.

TER: Thank you, Neal. I appreciate your time.

ND: Thank you for the questions.

Neal Dingmann has over 12 years of equity research experience. At SunTrust Robinson Humphrey, he covers companies in the E&P and oilfield services sectors. He held similar positions at Wunderlich Securities, Dahlman Rose, RBC Capital and Bank of America Securities. Dingmann was recognized last year by the Wall Street Journal as “Best on the Street” and has been recognized as a “Home Run Hitter” by Institutional Investor magazine. He received his Masters of Business Administration from the University of Minnesota and his Bachelor of Arts degree in business from the University of Arkansas.

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DISCLOSURE:

1) Tom Armistead conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Energy Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Neal Dingmann: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) The following companies are clients of SunTrust Robinson Humphrey, Inc. and the firm has received or is entitled to receive compensation for investment banking services involving their securities within the last 12 months: Gulfport Energy Corporation, Midstates Petroleum Company, Inc., Penn Virginia Corporation, Rex Energy Corporation. The following companies are clients of SunTrust Robinson Humphrey, Inc. and the firm has received compensation for non-investment banking services within the last 12 months: Midstates Petroleum Company, Inc. An affiliate of SunTrust Robinson Humphrey, Inc. has received compensation for products or services other than investment banking services from the following companies within the last 12 months: Gulfport Energy Corporation, Midstates Petroleum Company, Inc., Rex Energy Corporation.

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By MoneyMorning.com.au

Some things are easy.

Some things are hard.

Some people make hard things look easy — like darts players or crane operators.

While others make easy things look hard.

Many investors fall into the latter category. And we’re not just talking about novice investors either. Even the pros can take a simple concept and turn it into something completely unintelligible.

We’ll show you what we mean…

This week the Financial Times claimed that macro hedge fund managers (those who make big bets on big macro-economic events) had come back to the fore after a torrid few years.
The report quoted hedge fund manager Arvin Soh:

‘In Q1 it was all about Japan. Macro managers played that through the Nikkei and the yen. In Q2 it was about getting out of that and shorting precious metals. And in June and July it has been about shorting emerging markets – there have been opportunities in a whole bunch of asset classes.’

Wow! Buying the Nikkei…shorting precious metals…short selling emerging markets. Impressive. Or is it?

Not when you look at the alternative…

Don’t Muddy the Investing Waters

This is a classic example of taking something relatively easy and making a meal of it.

Because when you look at the results of the macro hedge funds that have supposedly made a comeback, well, given the market conditions they actually haven’t done that well.

As the FT reports, funds run by Caxton Associates are up 17% this year, those run by Tudor Investment Corporation have gained 12%, and Moore Capital’s hedge fund clients have made 10.5% so far.

Not bad. But as we say, consider the alternatives.

US investors who just bought plain old stocks in the S&P 500 are up 19% for the year so far…without paying huge hedge fund fees.

And to be honest with you, seeing as gold has slumped more than 20% this year and the Japanese market gained over 40% from January to May…a 10.5% gain isn’t that great.

Look, we’re not saying investing is simple, because it isn’t. But what we are saying is that you as an investor have a choice. You can choose to keep your investments as simple as possible or you can add in unnecessary complications.

To our mind, elements of macro investing do just that.

While it’s a good idea to look at the big picture, sometimes it can confuse you or muddy the waters.

It’s why we prefer a simple approach to investing. We recommend allocating your money to a few key asset classes: cash, gold, dividend stocks, and growth stocks.

Short and Long Term ‘Meddling Protection’

To us, macro investments are the things on which we focus the least amount of time. That’s cash and gold. If you like, they are the short and long-term protection against meddling.

We recommend buying and owning gold for the long term because ultimately governments will always devalue paper money. We don’t care about the shorter term booms and busts.

And we recommend holding cash in a savings account because, well, it’s important to have some security during the short-term booms and busts.

You see what we mean? That’s as complicated as you have to make it.

As an investor you should focus most of your attention on the micro-economic events — e.g. individual stocks.

This is where things get more complicated — but only relatively speaking. You can still choose to make stock investing easy, or you can complicate things.

Where possible, we prefer the former, and we recommend you do the same.

So, how can you keep things simple?

Easy Investing 101

For a start, you can limit the amount of income stocks in your portfolio. Rather than picking 20 OK stocks, spend a bit more time and pick 5, 6 or 7 great or outstanding stocks.

Then, if you don’t need the dividend cash, subscribe for the company dividend reinvestment programs (providing the companies offer it).

On the growth side, you can have as many stocks as you like. But again, we suggest keeping things manageable. Divide your speculative growth portfolio into short-term and long-term positions. You may have half a dozen punts you expect to hold for five or ten years.

Plus you may have another half a dozen punts you’re holding for the short term.

Whichever you choose, the decision is yours. Naturally, the more time you can devote to monitoring your stocks the more you can afford to own. If you barely have time to follow stocks then you should put a limit on the number you own.

Put simply, to be a successful investor in this market or any other market you don’t have to trade Japan, short sell gold, and gamble on emerging markets.

If you want some exposure to those markets go for it. Just don’t presume that’s the only way to make money in this market, because it isn’t.

As we’ve explained all the way through this current bull market rally, the best way to build wealth is with stocks. So keep it simple.

Cheers,
Kris+

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